KARACHI: The State Bank of Pakistan (SBP) has relaxed the regulatory framework governing the conversion of conventional banking branches into Islamic banking branches, aiming to facilitate the industry’s transition towards Shariah-compliant banking operations.
According to a circular issued by the central bank, the revised criteria are designed to address industry concerns and accelerate the pace of branch conversions as Pakistan continues to promote the growth of Islamic banking.
Notification Period Reduced to Two Months
One of the key changes introduced by the SBP is the reduction in the period required for informing the general public and account holders about the conversion of conventional branches into Islamic branches.
Banks will now be required to notify customers at least two months before conversion, compared with the previous requirement of three and a half months.
The notification must be made through:
• Notices published in leading Urdu and English newspapers;
• Display of notices at bank branches; and
• Announcements on the bank’s website or other banking channels used by customers.
Deemed Acceptance Process Simplified
The SBP has also reduced the interval between notices issued to customers regarding the conversion of current accounts under the deemed acceptance mechanism.
Under the revised framework, banks must issue two notices at intervals of 15 days, instead of the earlier requirement of 30 days.
The final notice must be sent at least 15 days before the effective conversion date, informing customers about changes in terms and conditions and the cut-off date for account conversion.
Customer Consent Remains Mandatory
The central bank reiterated that banks must make maximum efforts to obtain customers’ consent through various communication channels, including:
• Letters;
• Emails;
• SMS notifications;
• Telephone calls; and
• Digital banking platforms.
Customers must be provided with at least 30 days to submit their consent or dissent regarding account conversion.
Banks are also required to disclose new terms and conditions, fee structures, Islamic banking product features, profit rate expectations, and frequently asked questions related to Islamic banking.
Restrictions on Deemed Acceptance
The SBP clarified that deemed acceptance applies only to individual current accounts and cannot be used for:
• Savings accounts;
• Fixed deposit accounts;
• Financing and loan portfolios;
• Corporate and non-individual accounts;
• Accounts under litigation;
• Dormant or inactive accounts; and
• Accounts belonging to deceased individuals.
Additionally, accounts held by non-Muslim customers cannot be converted without explicit consent.
Virtual Cost Centres to Support Transition
To further facilitate branch conversions, banks will continue to be allowed to establish virtual conventional cost centres on a temporary basis for up to one year from the date of issuance of an Islamic banking branch licence.
These centres will be used solely to manage unconvertible conventional deposits and assets during the transition period.
The SBP emphasised that no new conventional business, enhancement of existing business, or rollover of conventional assets would be permitted through these virtual cost centres.
Strengthened Compliance and Governance Requirements
The revised framework also requires banks to:
• Designate senior officials to oversee branch conversions;
• Develop comprehensive standard operating procedures (SOPs);
• Conduct periodic internal Shariah reviews;
• Undertake thematic internal audits of converted branches;
• Establish effective customer complaint handling mechanisms; and
• Maintain detailed records of customer consents and communications for audit purposes.
The Head of Islamic Banking will continue to report directly to the President or Chief Executive Officer of the bank.
Applicability to Microfinance Banks
The SBP stated that the revised instructions will also apply to Microfinance Banks (MFBs) converting conventional branches into Islamic branches.
For MFBs operating with either a Shariah Board or Shariah Advisor, the relevant terminology will be applied interchangeably as appropriate.
Supporting Islamic Banking Expansion
The central bank said the updated criteria reflect its commitment to supporting the expansion of Islamic banking while ensuring adequate consumer protection and Shariah compliance throughout the conversion process.
The revised instructions have taken immediate effect, while all other existing guidelines related to branch conversion remain unchanged.
